A Full Guide on the 3 Types of Taxes and What They Mean For You

The 3 types of taxes in the U.S. tax system are progressive, regressive, and proportional taxes. Each type has an influence on everyone’s finances. And that can be positive or negative, depending on how much they earn.

You may be paying federal income tax, sales taxes or property taxes. No matter which one, you need to know the 3 types of taxes to understand your tax burden better. 

This guide breaks down the three types of taxes and discusses everything you need to know about taxes and their categories. One of the documents that gives you tax information is your pay stub. You can ensure you have this information handy by creating pay stubs with an online pay stub generator.

What Are the 3 Types of Taxes?

The 3 types of taxes have to do with how tax rates change as your pay or value increases. The three basic tax types are progressive, proportional and the regressive tax system. Every tax structure has its impact on both low-income earners and high-income earners.

A progressive tax system is one where those who earn more pay more tax. This means a larger percentage of their income goes to taxes. The most common example is the federal income tax. The rates range from 10% to 37% according to the income a person earns. 

A regressive taxation system implies that those who earn a low income will pay a higher percentage of what they earn. An example is sales tax and excise because everyone pays the same rate, no matter what they earn.

A proportional tax or flat tax means that everyone pays the same tax rate, regardless of the amount that they earn. This method is used in some state and local governments for income taxes.

Read More: What Is FWT on Paystub and What Does It Mean for You?

3 Types of Taxes: Progressive Tax

In a progressive tax system, the rate increases once your taxable income rises. The U.S. federal income tax is progressive, where individuals are put in different tax brackets based on how much they earn. This arrangement means that those who earn higher pay more as their income increases.

Federal Income Tax

The federal income tax works with what is called graduated tax brackets. For 2026, the rates for single filers start from 10% and go up to 37% for any income that is above $640,600. With this system, only the additional income that falls into each higher tax bracket gets the increased rate.

To illustrate the point, a single filer who makes $100,000 does not pay a single rate on the income. The standard deduction of $16,100 is taken out first. Then, they pay 10% on the first $12,400, 12% on the amount between $12,401 and $50,400, and 22% on the remaining up to $83,900.

Check Out: Generate pay stubs with online pay stub templates for accurate tax documentation

3 Types of Taxes: Regressive Tax 

A regressive tax is a system where those who earn less income pay a higher proportion of their income as tax. Even though everybody is facing the same rate, those who earn more pay a smaller percentage of their income. Such taxes are not based on ability to pay, and that’s why they’re controversial. However, they bring in lots of state and local revenue.

1. Sales Taxes and Consumption Tax

One of the most common types of regressive tax is sales tax. Whenever you buy goods and services, you pay a certain amount as tax, regardless of what you earn. Let’s say a notebook costs $100 and there’s a 6% tax on it. Even if one person earns $20,000 and another earns $200,000, both of you pay $6. However, someone paid a larger part of their income.

Families that earn a low income spend a larger portion of what they earn on these taxable goods. A family with an income of $30,000 may spend 80% of that money on consumption. This is because they’ll pay sales taxes on most of the things they buy. On the other hand, a family that earns $300,000 may spend 40% even if they buy the same items. 

Excise taxes on gasoline, cigarettes, and alcohol are more regressive. This is because the taxes are levied as fixed amounts per unit.

2. Payroll Taxes and Social Security

You can also see another example of regressive taxation in Payroll taxes for Social Security. This comes under the category of FICA taxes. For 2026, the Social Security tax rate is 6.2% on wages up to the limit, which is $184,500.

Once the income goes past that level, you don’t pay any additional tax on the money. This makes it regressive at such high incomes. On the other hand, Medicare tax is 1.45% on all wages with no cap. The federal government uses such payroll taxes to finance social insurance programs.

Also Read: Where To Find HSA Contributions on W2 and Other Tax Forms

3 Main Types of Taxes: Proportional Tax or Flat Tax

A proportional tax or flat tax system is one that uses the same tax rate for everyone. If the rate is 10%, that’s what it is for everyone, regardless of what you earn. So, it uses a uniform tax rate.

1. State and Local Tax 

Nine states use a flat tax system for their state income taxes, and they include: 

• Colorado

• Illinois

• Indiana

• Kentucky

• Massachusetts

• Michigan

• Mississippi

• North Carolina

• Pennsylvania

In case of a flat rate of 5%, a person earning $40,000 will pay $2,000. On the other hand, a person earning $400,000 will pay $20,000. Property taxes can also be proportional taxes in some cases. That’s when the taxes are assessed as a fixed percentage of value. Local governments use these revenues to fund schools, police, and infrastructure.

2. Gross Receipts Tax

Another example is the gross receipts tax that some states usually put on business revenues. This is different from income taxes, which are imposed on the profits that the business makes. So, that means it's taken out after subtracting business expenses. Gross receipts tax applies to all the sales the business makes before any deductions. And every dollar that the business earns is subject to the same rate.

This can be a burden on some businesses that don’t make a lot of profit. This is because this tax does not account for the costs of running the business. It’s also another controversial type of tax.  

Further Reading: Is PTO Taxed? Everything You Need to Know

Everything You Need To Know About Taxes by Category

Asides from the 3 types of taxes, there are some other categories of taxes that you need to understand. They are:

1. Direct Taxes vs Indirect Taxes

Direct taxes are paid directly by individuals or businesses to the government. For example, federal income tax, state income taxes, corporate income tax and property taxes. You may have seen these figures on your tax bill.

For indirect taxes, you pay them to an intermediary who passes them on to the government. For example, sales taxes and excise taxes. You pay it to the retailer, and the retailer remits it to the state and local governments. So, most of the burden falls on the consumers. 

Corporate tax rates are a bit more complicated. Corporations have to pay corporate income tax directly to the government. On the face of it, corporate income tax is a direct tax. However, economists debate who actually bears the burden. This is because companies, even if they pay corporate income tax, can always increase prices or even reduce workers’ salaries. 

2. Capital Gains Taxes and Estate Taxes

Capital gains taxes come into play when you sell something, such as a house or investments. That’s when you sell at a higher price than you bought it. So, you made a profit. Long-term capital gains on assets held over one year sometimes face preferential tax rates. Thus can be 0%, 15%, or 20%, depending on what the taxable income is. This is generally lower than the normal income tax rates.

Estate taxes and inheritance taxes come up when someone’s wealth goes to another person after death. The federal estate tax is only for estates that have a value of more than $15 million in 2026. So, we can say that it’s a tax on the wealthy. Some states have their own estate taxes, but the thresholds may be lower.

These estate and inheritance taxes are mostly progressive.

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Closing

Knowing the 3 types of taxes is important for you to go through the tax system easily. Each tax structure affects your tax burden differently. Once you know how the types of taxes work better, you can better understand your tax bill and make more informed financial decisions. Yes, the tax system may be complex, but the foundation remains these 3 types of taxes affecting all taxpayers.

One of the important documents you need to keep track of taxes is your pay stub. You can create your pay stubs with our reliable pay stub maker. With our tool, you’ll always have an important tax document within reach.